This is the third of a series of articles looking at the Succession Planning process from the perspective of each of the major stakeholders: Mum and Dad, the On-Farm children and the Off-Farm children.
It is important to gain a commitment from all family members to the process and to the goal of a positive outcome. This can be best achieved by understanding the viewpoints, aspirations and concerns of each of the parties.
In our last article we discussed the issues relating to Farm Succession from the perspective of the “On-Farm” children. This month we will consider the interests of Mum and Dad, who, at some time in the future, wish to pass the farm on to the next generation and begin the process of planning for their retirement.
In the last two articles we included real life examples of the comments we receive from the various stakeholders. The most common type of comment we get from the current owners (Mum and Dad) is:
“We have spent a lifetime growing this place but will we have enough money to retire on”
Other concerns include:
“I know it’s time to pass the farm on to the kids but, as a Mum, l just don’t want family conflict”
“We need enough money to secure our retirement but I don’t want to burden the kids with too much debt”
“I hate discussing this but what will happen to the Succession Plan if one of the kids gets divorced”
“I understand that the kids can purchase the farm over time from the business profits but if something happens to prevent those payments, our retirement income will be seriously affected”
“ I am not sure that the kids have the skills and knowledge to take over the business at this point”
“ I am pleased to pass on a legacy that has taken generations to build but I don’t want the kids putting the property on the market as soon as it is transferred”
Business transition and succession planning cannot be approached as a one-time event. Instead, it is a process that should begin long before the owners plan to exit the business. Starting the conversation early also ensures you can select from the widest range of options available to you.
If appropriate, succession plans can take place over extended periods of time, in some cases 10- 15 years.
This can help ease the burden on the next generation by smoothing out the cost of purchase. Ownership and /or management can be passed to the next generation over time thereby allowing them to develop their skills and capacity to derive income.
At the same time, it is essential that the retirement and estate plan for the exiting owners takes account of unforeseen events along the way. These events could include a divorce or separation experienced by one or more of the new owners or sadly the children predeceasing the parents.
Although it can be difficult to discuss these unfortunate outcomes, it is essential that contingency plans are included as part of the overall succession solution. Utilising the services of an independent facilitator will make it easier to deal with these types of issues.
A sound financial plan is essential for Mum and Dad. They will need to determine how much income they need for retirement and make sure that the payments being made by the next generation, together with any off farm assets are adequate to maintain their lifestyle goals and aspirations. They will also need to carefully think about the nature of any investment decisions such as the risk profile of their superannuation fund. An accurate risk assessment will take account of the underlying volatility of the payments being received from the children. This may mean that other assets should be invested conservatively to offset the risk of the payments being suspended or reduced for a period of time. The actual decisions made will be different in all circumstances and advice should be sought from a suitably qualified professional who has a clear understanding of all aspects of the Succession Plan. Most importantly the Financial Plan should be an integral part of the Succession Plan and not treated as a separate exercise.
Finally, for Mum and Dad, the worry of potential family conflict can be a serious concern. An effective way to start the conversation is to conduct a formal family meeting to better understand the attitudes of the participants to the business transition and succession process.
The following list of questions and subjects can help to open discussions:
- What would the ideal outcome be from the business transition planning process for the business?
- What about the outcome for the family?
- What are the key issues that would need to be resolved to reach an outcome that would satisfy everyone?
- What would make you feel the process was successful?
- What would be the consequences if this process wasn’t undertaken? For the business? For the family?
List the top three issues that you think could put a good outcome at risk
It is important that any issues are clearly identified and a resolution and commitment achieved. A family meeting may help to identify the potential for any conflicts or difficulties amongst family members that may inhibit the planning process. A meeting should also help all participants understand the feelings and attitudes of the various stakeholders. Most importantly all participants need to participate honestly and openly without fear or favour, to gain maximum benefit.
Next Rural have put together a simple yet comprehensive guide to business transition and succession planning. To obtain a copy of this guide FREE, and with no obligation, simply email Next Rural on firstname.lastname@example.org or call 1800 708 495.